Comment: Do we need a moratorium on oil sands development?

In a comment published in Nature on June 25, Wendy Palen of Simon Fraser University and a series of co-authors argue that a policy should be imposed in North America such that, “no new oil sands projects should move forward unless developments are consistent with national and international commitments to reducing carbon pollution.”

We have been working on the relationship between new oil sands investments and local and global climate change policies for some time, so we responded to this article with a letter to Nature. Since correspondence with Nature is limited to 300 words, we expand on our arguments here:

Palen and co-authors argue, accurately, that individual pipelines, oil sands developments, and other related projects are often evaluated by regulators on an incremental basis—one exception to this is the State Department review of the Keystone XL project. The authors argue that such analysis leads to a case where oil sands development imposes “unnecessarily high social, economic and environmental costs,” but they do not provide an estimate of the size of those costs.

courtesy: Jiri Rezac / WWF / Polaris

The authors suggest three criteria for oil sands policies: that such policies internalize the social cost of carbon, that policies be consistent with Canada’s greenhouse gas targets, and that policies be consistent with global carbon stabilization goals. In the absence of this, they argue, a moratorium should be imposed on new oil sands projects and pipelines. Our work, and other work in the field, suggests that none of these criteria provides support for an oil sands moratorium.

The most basic premise of environmental economics is that, in order to maximize economic efficiency, developers should not be permitted to impose costs on others without compensation—internalizing the externalities, in econo-speak (yes, David Suzuki, it is). Palen and her co-authors suggest that policies be imposed such that the “full social costs of carbon combustion are incorporated into investment decisions about energy and infrastructure,” although they don’t provide significant detail on what that would look like.

In our response, we cite figures for oil sands production emissions that are generally less than 0.1 tonnes per barrel of bitumen produced. When combined with the most recent U.S. government estimates for the social cost of carbon emissions, this implies that the externality associated with oil sands production would amount to less than $6.50 per barrel in almost all cases, and significantly less than that in many cases. If these costs were to be imposed on oil sands producers, for example, through a carbon tax, producer profits would decline by, at most, about $3 per barrel, as the balance of the carbon costs would be offset by tax and royalty deductions. There are, perhaps, some new oil sands projects that would not proceed under costs increased by $3 per barrel, but the likelihood that such a charge would lead to an effective moratorium on new projects is very small.

What the authors don’t consider at all is the costs of a moratorium. Let’s be generous and assume that none of the foregone production would be made up anywhere else, so these cost savings would equate to the $6.50 per barrel not produced discussed above, but we’d be forgoing the value of the produced bitumen in lost taxes, royalties and profits (not to mention wages). These savings would, at least in most cases, represent a false economy. The fact that there are external costs does not imply that we’d be better off not undertaking the activity, and Palen and her co-authors do not make the case that the costs of a moratorium would not exceed the full social costs of bitumen production. For a complete analysis—ironically, what the authors suggest is required—you’d need to consider the benefits and costs of production as a whole.

Some will argue that it’s not just the production emissions that create externalities, but the consumption of the refined products, as well. That’s true, and that’s also where the lion’s share of the emissions occur. But, if you think that these emissions justify a moratorium on oil sands production, the same logic must apply to all oil production, for which the social costs of carbon from combustion are not internalized. Given the state of global carbon policy, if you’re making that argument, you’d be calling for a quasi-global moratorium on new, if not all, oil production. We might, again, find the social costs of such a moratorium to be quite high.

With regard to national commitments, Palen and her co-authors correctly state that Canada is projected to miss its Copenhagen target by 122 million tonnes in 2020, “while oil sands production emissions are projected to increase from 34 million tonnes in 2005 to to 101 million tonnes by 2020.” However, many models, including the CIMS model developed by Palen’s co-author, Mark Jaccard, and several cohorts of graduate students, have shown that oil sands emissions would likely continue to grow, even in a scenario where Canada imposed cost-effective carbon pricing policies to meet its targets. Don’t believe us? Ask David Suzuki and the Pembina Institute.

An oil sands moratorium alone would not likely lead to Canada meeting its Copenhagen targets. If Canada wants to meet its target, we’re going to need stringent, national policy to get there. Even then, it’s likely that we’ll see oil sands production continue to grow, or, at least, that’s what one of the National Roundtable on the Environment and Economy’s last reports told us. More likely, an oil sands moratorium would be an expensive policy that would allow us to avoid going after many lower-cost emissions reductions in the broader economy. Not exactly efficient.

Palen and her co-authors also call for oil sands policies consistent with “international commitments to reducing carbon pollution.” Here, again, there is no evidence that an oil sands moratorium is necessary for such an outcome, although some models have shown significant decreases in oil sands production in response to particular global policy scenarios. If we look at data from the International Energy Agency’s 450-ppm scenario, global oil production in 2035 is still 76 million barrels per day and emissions globally remain above 20 billion tonnes per year. Where those emissions come from in any given model run is a matter of the assumptions you make about regional and national policies: If you assume stringent targets for Canada, you get a lower share of those emissions from oil sands, and vice versa. Regardless of how you feel emissions should be distributed across the globe, and no matter how you run your models, it’s going to be hard to argue that emissions from oil sands are going to be the difference between stabilization and disaster.

An oil sands moratorium would be one of the most significant economic policies undertaken in Canada in decades. A proposal for such a policy deserves a more complete analysis, just as Palen and her co-authors would have us undertake for pipelines.